"Financial protection remains the cornerstone of financial planning, it should equally be fully in scope and the cornerstone of the FCA’s advice/guidance review."
- Neil McCarthy, chair of the PDG
In August 2021, The Financial Conduct Authority (FCA) published its expectations for the life insurance sector, setting out its view on key risks and its supervisory strategy. Since then, it has written numerous letters to life insurers emphasising the importance that the sector “meets the standards we expect to support customers, including those in financial difficulty.”
While the FCA has generally seen good intent from the life insurance market and broader insurance, in its most recent letter, the financial watchdog said it remains “concerned” that not enough action is being taken to ensure good outcomes for customers. Therefore it now expects Boards to “ensure concrete, proactive action is taken throughout the firm in line with our rules and expectations and not to treat them as a compliance exercise.”
Given these previous communications, the financial watchdog will now consider using its range of regulatory tools to assess the effectiveness of its implementation, potentially including mystery shopping exercises across different sectors.
Responding to the FCA’s letter outlining its priorities for the life insurance market and broader insurance, on behalf of the Protection Distributors Group (PDG), Neil McCarthy has said that it “welcomes the FCA’s clarification of what it wants from all businesses serving consumers in the insurance market and supports both their overall intentions and agrees entirely with the Market-wide and Life Insurance specific priorities.” But, as protection retailers the PDG asks for “specific clarity as to what the FCA wants to improve in terms of consumer outcomes in protection.”
The PDG notes that this letter builds on that of the 3rd February, titled: Implementing the Consumer Duty in Life Insurance, in which the FCA said that “the Duty will be a significant shift in what we expect of firms. It means making lasting changes to your culture and behaviour to consistently deliver good outcomes. It also means putting customers in a position where they can make informed decisions, where they are presented with products and services that are suitable for their individual needs and that provide fair value. The Duty will require all firms, whether designing, selling, or advising on products and services, to demonstrate that they are acting to deliver good outcomes for their customers.” Since the PDG exists to “help our market achieve precisely those aims, it is fair that we judge both the earlier letter and yesterday’s Dear CEO letter by what we see as their effectiveness in achieving them.”
McCarthy expressed that the PDG “share the FCA’s concerns at the service and claims management standard offered to our clients who end up the customers of closed book operators.”
However, noting the comment that “where regulated advice is not provided, firms consider the guidance they can provide to deliver good outcomes for their customers”, and that the FCA continues to work with Treasury to review the Advice Guidance Boundary, he said that this “guidance for firms on how best to provide support within the current rules’ refers exclusively to investment decisions.” Consequently, the PDG asks for “clarity as to whether this reads through to protection in its entirety and suggests an equivalent document relating specifically to pure protection would add value and clarity.”
“We strongly believe that long-term financial protection insurance should be brought into scope as this will better enable consumers to benefit from the improved understanding, value, service and support outcomes that the Consumer Duty will deliver,” he said.
Meanwhile, the PDG is “delighted” that its representations to the FCA have been reflected, as they “continue to see evidence of poor selling practices of protection products.” The financial watchdog said that “while our data provided evidence of insurers taking appropriate actions in response to intelligence about poor broker conduct and remediating customers, we consider that insurers could often have acted sooner.”
The PDG was also supportive of the FCA’s “want to see firms improve their due diligence on new brokers to avoid their products being sold to customers for whom they will not pay out as expected, and to avoid the unnecessary re-broking of policies,” and its belief that “insurers should monitor brokers in their distribution channels to identify instances where either unsuitable product may be sold, or products do not offer fair value.”
Overall, the PDG is grateful for “all the work that the FCA has put into better understanding the current protection market,” but asks for the protection market’s marked difference to Pensions, Annuity, Investment and General Insurance to be further addressed through more specific guidance.
“We believe our market urgently needs to address these issues and worry that the very general nature of this letter might not drive that as fast as the FCA clearly hopes it will,” McCarthy concluded.